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July 27, 2016 | The Slippery Slope

A best-selling Canadian author of 14 books on economic trends, real estate, the financial crisis, personal finance strategies, taxation and politics. Nationally-known speaker and lecturer on macroeconomics, the housing market and investment techniques. He is a licensed Investment Advisor with a fee-based, no-commission Toronto-based practice serving clients across Canada.

 

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On CBC Toronto Wednesday morning housing economist Frank Clayton argued for a heavy tax on foreign dudes in the GTA. Phooey, I said, in an articulate response. That would be thick.

Of course the CBC host was on the side of stiffing the out-of-country buyers. So are most people on this blog. And in Vancouver. Maybe everywhere. But they’re still wrong. Too much government diddling in the housing marketplace has distorted it. In fact for decades, there’ve been strong pro-real estate measures enacted by every successive group of politicians, leading us directly to now – when the average family can no longer afford the average home.

Artificially-low borrowing rates, government-backed mortgage insurance, legislated 5% down payments, RRSP homebuyer loans, first-timers grants, property tax rebates, land transfer tax exemptions – the list of interventions is endless. So now crap houses cost a million. Good job, government.

As a result of unaffordability (it takes 110% of gross income to carry a house in Van and 73% in Toronto – even with a huge down payment), governments want new taxes to try and correct mistakes already made. Thus by dumping big levies on foreign buyers they seek to soothe the locals, saying markets “will cool off.†So naïve.

Still, Ontario’s finance guy, Charles Souza, insists the province is closely watching the new Van Chinese Dudes Crash Tax saying, “I welcome what BC is putting forward and we’re certainly looking at whatever options can be made available.†This is significant, since both Sousa and BC’s wacky finance minister sit on the newly-minted federal task force on housing, set up by federal minister Bill Morneau.

In other words, dumping on foreigners has legs. Most people see this in the same light as new T2 taxes on the wealthy or slashing the TFSA contribution limit – a way to gouge others better off then they, without consequence. So cute and Millenialesque.

Here are the basic reasons why we’re now on a slippery slope every homeowner should worry about:

There’s simply no data showing foreign guys caused houses to go ballistic, and overwhelming evidence Canadians have done this themselves (with the help of politicians). Even the latest Van stats reveal locals and foreigners spent an identical amount per purchase, and Canadians outnumbered them by nine-to-one. Case closed. We’re reaping the harvest of our own house horniness, FOMO sniffing and debt snorfling.

Second, the market will find its own direction – which was already heading south. As this pathetic blog has documented with nauseating repetition, sales are falling, listings rising, sales ratios eroding and speculation spreading in 604. The Chinese-spanking tax will serve to remove some missing-out anxiety from the public’s mind, spread the meme of a cooling market and help ratchet a normal correction into something worse.

Third, taxes – especially ones imposed only on a narrow geographic area – are destined to cause more problems than they fix. If Chinese Money-Laundering Dudes (as everyone categorizes them) really want to wash-&-rinse in Canada, then they can do that as easily in Victoria or Kamloops as Vancouver or Burnaby. If Toronto brings in an eat-the-foreigner tax, then won’t money flow to K-W, Hamilton or London? In addition, people are clever little weasels. Already lawyers, realtors, accountants and advisors are plotting ways to avoid the head tax – so we’re on the way to a bloated bureaucracy which may cost more than it collects.

Fourth, the economy. It blows. Growth may be 1% this year if we’re lucky. Jobs are scarce, commodities weak and Alberta is pooched. Is this really the time to be shutting the door on foreign capital?

Fifth, Toronto’s not Vancouver. Six times bigger, far less anxiety over foreigners. Sticking a Chinese Dudes Crash Tax on the GTA would be nothing more than a tax grab in drag. Very bad idea, because…

Finally, real estate’s in big trouble already. Just about everywhere – even as most people are completely blind to the risks. Why else would the bank regulator ask financial institutions to stress test for a 50% property crash in YVR and a 40% drop in Toronto this week? At the same time CMHC is setting its pants on fire, saying there is (for the first time ever) “strong evidence†of problematic conditions in both Vancouver and the GTA.

“We now have sufficient evidence to raise our overall assessment of problematic conditions in the Vancouver market to high,†it shouts. “For Canada overall, we now detect strong evidence of overvaluation.â€

Add it up. Bank CEOs warning about excessive borrowing. Two of them curtailing mortgage lending in YVR. The regulator worried about a housing Armageddon. CMHC sounding an historic alarm over too-costly houses. Every major US debt rating agency saying we’re nuts. Warnings from the IMF and World Bank. Prices wobbling dangerously higher on thinning sales. Unheard-of levels of household debt, while incomes flatline and the GDP groans. And now, an unnecessary, politicized assault on foreign investment.

The inflated, voracious, teetering housing market that sucked so many in was created in Canada by Canadians and their leaders. It constitutes a great risk. What a moment to push it over the edge, all because of myth and xenophobia.

We’re getting Trumped.

CHART

Chart by Gary Anderson, Blog Dog (click to enlarge)

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July 27th, 2016

Posted In: The Greater Fool

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